MNI INTERVIEW: BOC Could Cut 50 BPS Again On Tariffs-Ex Econ
MNI (OTTAWA) - The Bank of Canada could deliver a third jumbo rate cut at the Jan. 29 decision if President-Elect Donald Trump imposes 25% tariffs upon taking office the week before, shaking up an intended shift to gradual easing, former central bank economist David Watt told MNI.
If Trump imposes the full tariff, the Bank’s modeling will likely suggest a response, depending in part on whether Canada retaliates like it did last time, Watt said. Governor Tiff Macklem cut rates by a half point for a second straight meeting to 3.25% Wednesday and said the base case is for stronger household spending after substantial easing, calling tariffs a potential major disruption.
“If we're dealing with 25% tariffs on Canadian exports, that soft landing scenario does become very hard to argue," said Watt, now an independent consultant in Toronto. “When they are going to the 29th they're going to have to consider another lumpy rate cut.” (See: MNI INTERVIEW: BOC Faces Recessionary Risk On Tariff Hit: Lane)
Prime Minister Justin Trudeau has said he will ramp up border security in response to Trump's underlying complaint about illegal migrants and drugs, and pointed to the incoming president's first term when retaliatory tariffs helped remove the trade penalties. Even if Trump is bluffing as some experts suggest, continued threats to shred his own USMCA trade deal in coming years and slash corporate taxes puts further pressure on Canada's weak investment and productivity.
EVENTS THEY CAN'T CONTROL
Macklem said further gradual rate cuts are reasonable in an economy with a modest amount of slack, some weakness in the job market and an expected drag next year as the government curbs immigration. Most economists see quarter-point cuts including some pauses through the first half of next year, bringing the policy rate into a neutral range.
So long as the worst-case tariff scenario is avoided, Watt said the Bank's gradualism makes sense. Back-to-back jumbo cuts have little precedent outside a crisis since the Bank adopted fixed meeting dates in 2000. (See: MNI INTERVIEW: BOC Gradualism May Withstand Tariffs: CD Howe)
“They will be having a debate over incoming meetings over: Do we go zero or 25 as opposed to, do we go 25 or 50?,” Watt said. “I don't think they necessarily feel that they have to put rates into the stimulative category,” he said.
In a regular scenario the Bank will be “probing” a neutral rate and in particular seeing how the job market and household spending responds to the easing cycle, said Watt, who has also worked at Canada's housing agency.
The problem is that "a lot of it is going to come down to events they can't control.”